Identify 12 Accounting Principles and Their Effects on Financial Statements

Understanding the basic Accounting principles is very essential in preparing the financial statements because these are the basic framework and guiding principles on which financial statements are made and are accepted worldwide. These principles were made by Financial Accounting Standard Board (FASB) and are known as Generally Accepted Accounting Principles (GAAP) which is based on 12 assumptions which are as follows:

Accounting Entity

Revise. L (1998) suggest that business is a separate entity, it has its own assets liabilities and its operations are separate from its owner. With this concept the profits, revenues and expenses are recorded in the financial statements that will be generated through business transactions only, however all the personal and private transactions are ignored.

Going concern

This assumption states that when a business is established it will stay and operate forever, it will never be liquidated. This concept is very helpful in preparing the financial statements it allows the fixed assets to depreciate for the longer period of time and it gives the investors a confidence to get the return in future and also to the creditors who believe their loans and debts will be recovered. Andersen. A (2003).

Conservatism

Strathern.P (2002) argues that this principle guide the accountants to record the business transaction at fair value. It should not be overstated nor understated. However, when there is any situation of doubt in values then it should be recorded at lower amount. With this assumption accountant make less optimistic decisions and do not overstate profits neither underestimate losses. They follow a reasonable approach.

The Objectivity Principle

This principle says the amount recorded in financial statements will based on some objective evidence or source document. This principle mainly helps in bookkeeping and recording the transaction free from bias and which have documentary proofs for every transaction recorded. Buckley. M (2006)

Time Period Concept

This principle suggest that every business has to prepare financial reports at the end of their accounting period. This time can be weekly, monthly, quarterly, biannually or annually. With this assumption it is believed that life of business is divided into parts and every part is known as accounting period. There are two types of accounting periods one is fiscal period that is one year of length and other is interim period that is usually less than one year. This assumption helps many parties in preparing and interpreting financial statements. With this assumption investor, banks, financial institutions and creditors can predict the future prospects of business and can evaluate and analyze the performance of business over specific period of time. Moreover, it helps in calculating taxes on business on a particular period of time because at the end of period businesses have to prepare their reports and disclose the financials position of business to the stake holders. Horngren. C (1999).

Accrual accounting assumption

Hilton. R (1991). The word accrual means that something that has come due and we have to pay or receive at the end of period. So accrual basis of account suggests that whenever you recognize the revenue or incur an expense you should record in that particular time period regardless of cash is received or paid. This principle helps to calculate accurate revenue and expenses of that particular period of time and knowing actual profits earned in that accounting period.

Matching Principle

Thomsett. M (2001). This principle is very much interesting and logical in sense it says any expense related to particular revenue earned should be recorded in that period only. In other words, expenses should be matched with their revenues. This rule gives an accurate measure to estimate exact cost and benefit from particular economic activity. Accountants can calculate exact profits by allocating the right expenses to a particular revenue earned and indeed it is very much helpful for investors to know the exact profits and losses of a particular accounting period.